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February 13, 2014

Global AUM to Top $100 Trillion by 2020

Pension funds, mass affluent driving growth, PwC says

Global assets under management are expected to hit about $102 trillion by 2020, with about half of those assets held in North America, according to PwC.

North American AUM are expected to grow by more than 5% between 2012 and 2020, from more than $33 trillion to $49 trillion.

Expected growth in pension fund assets is behind a lot of the estimated growth in assets overall, PwC found. In 2012, there was more than $19 trillion invested in pension funds. The report estimates that will increase by nearly 6% per year to $30 trillion by 2020, just in North America. Globally, PwC expects assets in pension funds will reach $56.5 trillion by 2020.

Although PwC estimates assets in North America will outnumber those in other regions, the report found the economies in South America, Asia, Africa and the Middle East will likely grow faster than those in the developed world.

Specifically, PwC expects to see an increase in the number of mass affluent, those with between $100,000 and $1 million, and high-net-worth-individuals in those regions. The Asia-Pacific region will show the most growth in assets from mass affluent investors, followed by Europe, North America, Latin America and Africa.

Also fueling growth is a rapidly increasing middle class with a greater need for financial products. PwC estimates the global middle class will grow by 180% between 2010 and 2040, with the bulk of middle-class investors living in Asia by 2015. “Although the growing middle class represents low individual wealth, there is significant opportunity to serve that demographic if done thoughtfully and efficiently,” according to the report.

PwC identified six dynamics the asset management industry has to control for this projected growth.

First is that banks and insurance companies will lose influence in the financial industry by 2020, and demographic and market changes will make asset management more in demand. Regulations will whittle away at banks and insurers influence, according to PwC, and retirement and health care needs will make it necessary for investors to focus on long-term accumulation.

PwC suggested asset managers take advantage of these changes by deepening the level of trust their community has in them. “Asset managers are not quasi- (or shadow) banks. They will need to demonstrate that they can serve the requirements of their clients by being client-centric, and of the broader economy by acting at all times in the best interest of clients and facilitating capital flows and capital allocation in the economy,” according to the report.

Distribution could change over the next several years as regional “fund distribution blocks” in North Asia, South Asia, Latin America and Europe begin to trade with each other. PwC predicted the United States will not be part of this change as it “adheres to its existing investment company regulatory model.”

Changing fee models will also affect growth in assets as new regulations increase transparency for investors but drive up the cost to the asset manager. The most common regulation PwC anticipates is a prohibition of asset managers allocating to distributors.

PwC predicts alternatives will become more mainstream. The report estimates alternative assets will grow at more than 9% per year, reaching $13 trillion in 2020. Passive investments, too, will increase, growing to $22.7 trillion by 2020.

PwC expects global managers will become more streamlined by 2020, offering targeted solutions and developing more trusted brands.

“Amid unprecedented economic turmoil and regulatory change, most asset managers have not had time to bring the future into focus,” Barry Benjamin, global asset management leader for PwC, said in a statement. “However, as the industry stands on the precipice of a number of fundamental shifts and the potential for significant volumes of assets, there is more responsibility on firms than ever to manage these assets to the best of their collective ability. Strong branding and investor trust in 2020 will only be achieved by those firms that place a premium on transparency, a concrete value proposition to customers, and a firm commitment to avoiding practices that could prompt concerns among investors, regulators and policymakers.”